Thursday, August 09, 2012

Example of Why Math is Important

A few years ago, when I was teaching an Algebra 1 class, I had a student tell me he didn't need to know math because he was going into the diamond business. Of course, I knew nothing about the diamond business at the time, but still pointed out that knowing how to convert currencies was necessary as was determining how well cut a diamond was which would require geometry.

Ironically, while I've been struggling to find another teaching position in the past year and a half, I've been working in the jewelry business. My job is a cross between Antiques Roadshow and Pawn Stars specializing in jewelry.

I'm constantly impressed by just how much I use math skills and how difficult communicating ideas with people is that have no math skills.

One of the most common ways is to determine the weight of a diamond (diamonds are measured in carats, which is a weight). Since they tend to come to us already in jewelry, we can't weigh them directly. Instead, you find the volume and multiply by the density. At least, indirectly. The way it ends up working is you measure the height, width, and depth of the stone, multiply that together, and then look up a factor that already wraps together the density and accounts for the volume of that box you just calculated that's been cut out.

Most often, people don't remember what the total weight of their diamonds was when they bring it to me. I'll measure it out for them and ask them if it sounds familiar. But getting them to understand what I'm saying is a trick because diamonds very rarely come in exact whole numbers of carats. I've tried giving people the weights in decimals, fractions, and percentages. But people don't get these types of numbers. They constantly ask me if "six tenths" is more or less than a half. If I were an unscrupulous person, I could lie and offer people far less than what things are really worth since they're too confused to accurately understand these things.

Another example of things that people don't understand is relative values. Admittedly, this is somewhat of a complex issue because there's a lot of factors that go into something like that. I had a customer recently that was certain that they were going to get more for their jewelry than they paid for it originally because "gold prices are so high!"

What they often don't understand is all the other factors besides just raw materials.

For example, let's say a ring had \$200 worth of gold in it 15 years ago. The raw materials are usually assembled into a piece of jewelry by a manufacturer who then sells it to a jeweler who then resells it to a customer. Since jewelry is one of those things that people don't tend to buy every day, they have to have a pretty high markup to stay in business. As such, at each of those steps, there's a markup of about 3 times. So \$200 becomes \$600 becomes \$1800. And that's being generous. There's a lot of jewelry we see that, while it has a lot of stones in it, they're a bunch of very small ones, so the work went into setting all the stones, when the stones are so small they're virtually worthless, driving the markups even higher.

In that past 15 years, the value of gold has gone up by about a factor of 8. So those raw materials (often what we value a piece based on since jewelry styles change and a ring from 15 years ago often won't sell) are now worth about \$1600. Certainly still shy of what was originally paid. But that would be if we could offer 100% of what the materials were worth. Even dealing in large volumes with a refinery, we will lose about 5% of that. Plus our company has to be making something too. As such, from that \$1600, we generally do a split of 2/3 for them, 1/3 for us (most places do 50/50 or worse). So now the offer goes from \$1600 to around \$1000.

But how do you explain this to someone who doesn't know math? When they don't understand these things, even very good, fair offers get passed up and people continue owning thousands of dollars in items they don't even wear.

Knowing math helps you make sure you're being treated fairly as a customer, both as a buyer and a seller.